U.S. Stocks Sink in Biggest Drop Since 2008 on Economic Concern
Wall Street
Jin Lee/AP
Stocks slid to their lows of the day Friday amid speculation S&P was close to announcing a reduction in the U.S. AAA credit ranking.
Stocks slid to their lows of the day Friday amid speculation S&P was close to announcing a reduction in the U.S. AAA credit ranking. Photographer: Jin Lee/AP
U.S. stocks fell the most in 32 months this week, erasing the Standard & Poor’s 500 Index’s 2011 advance, as investors fled equities amid signs that the economy is stalling. An early rally faded yesterday as concern grew that S&P would cut the American credit rating, speculation which proved to be true after financial markets closed.
Bank of America Corp. (BAC) and Alcoa Inc. tumbled more than 13 percent, leading losses in the Dow Jones Industrial Average. Caterpillar Inc. (CAT) retreated 7.9 percent, while General Electric Co. (GE) sank 7.8 percent. Energy and materials companies in the S&P 500 fell 9.5 percent or more, the most among 10 industries, as every group declined. Losses exceeded 10 percent for 167 out of 500 companies in the index, and nine rose.
The S&P 500 slumped 7.2 percent to 1,199.38, the biggest weekly drop since November 2008 and the lowest level since Nov. 30, 2010. The Dow rose 60.93 points yesterday. For the week, it dropped 698.63 points, or 5.8 percent, to 11,444.61. The measures erased year-to-date gains that reached 8.4 percent and 11 percent as of April 29, respectively.
“It was disaster,” Michael Gibbs, Memphis, Tennessee- based chief equity strategist at Morgan Keegan Inc., said yesterday in a telephone interview. His firm oversees about $80 billion in client assets. “The weakness in the U.S. economy combined with the lack of confidence in European leadership made the perfect storm for investors.”
About $1.87 trillion has been erased from the value of U.S. equities since July 22, including the 4.8 percent plunge by the S&P 500 on Aug. 4 that was the biggest drop since February 2009.
Seeking Safety
Investors speculated the global economy may contract, driving them out of stocks and the euro and into havens such as Treasuries. European Central Bank President Jean-Claude Trichet tried to stamp out investor concern that the 21-month crisis will spread to Italy and Spain, the region’s third- and fourth- largest economies.
Stocks have slumped two straight weeks as reports on manufacturing and consumer spending showed the world’s largest economy is slowing. The S&P 500 fell 0.1 percent yesterday even after the U.S. Commerce Department said employers added 117,000 jobs last month, topping the median economist projection of 85,000 in a Bloomberg survey. The S&P 500 has retreated 11 percent since July 22, the biggest loss over the same amount of time since March 2009, when the equity bull market began.
The S&P 500 climbed as much as 1.5 percent in the first five minutes of trading yesterday before turning lower as speculation swirled through the market that S&P was preparing to strip the U.S. of its AAA rating for the first time. S&P cut the rating one level to AA+ after financial markets closed on Aug. 5, criticizing the nation’s political process and saying lawmakers failed to cut spending enough to reduce record deficits.
Cyclicals Slump
The Morgan Stanley Cyclical Index of companies most-tied to economic growth tumbled 11 percent this week as all 30 of its stocks retreated. The Dow Jones Transportation Average of 20 stocks, also considered a proxy for the economy, slumped 9.5 percent. Both gauges fell the most since March 2009.
United Technologies Corp. (UTX), the maker of Pratt & Whitney jet engines, retreated the most since October 2008, losing 11 percent to $74.14. Boeing Co. (BA), the world’s second-largest maker of commercial aircraft, slipped 11 percent to $62.75. Caterpillar, the world’s largest construction and mining- equipment maker, declined 7.9 percent to $90.99.
While mounting concern U.S. growth is slowing has driven down stocks, Wall Street has never been more sure that the S&P 500 Index (SPX) will rally in 2011. Chief strategists at 13 banks from Barclays Plc to UBS AG see the benchmark measure of American equity surging 17 percent through Dec. 31, the average estimate in a Bloomberg survey. Their projection that the index will reach 1,401 hasn’t budged in four weeks.
‘Reluctant to Overreact’
“I’m reluctant to overreact to some shorter-term weakness, no matter how real it is, because the market has proven to be unbelievably resilient,” Jonathan Golub, the chief U.S. market strategist at UBS in New York, said in an Aug. 3 phone interview. He says the S&P 500 will end the year at 1,425.
The U.S. debt-ceiling compromise failed to prevent losses for equity investors. President Barack Obama signed the law on Aug. 2, avoiding a default on the day the Treasury warned the nation’s borrowing authority would expire. The agreement ended a months-long debate that reinforced partisan divisions over federal spending while deferring decisions on the nation’s finances to a bipartisan panel.
‘Kicked the Can’
“We kicked the can down the road with regard to the heavy lifting on the spending cuts,” Scott Migliori, the San Francisco-based U.S. chief investment officer at RCM Capital Management, a unit of Allianz Global Investors, said yesterday in a telephone interview. RCM oversees more than $145 billion. “The uncertainty about which sectors of the economy will face spending cuts remains an overhang, not only on the equity market but also on corporate America’s decisions on hiring and capital expenditures.”
The odds of a U.S. downturn are rising amid cutbacks in spending by consumers and the government, according to five of the nine members of the panel that dates recessions.
“This economy is really balanced on the edge,” Harvard University economics professor Martin Feldstein, a member of the Business Cycle Dating Committee of the National Bureau of Economic Research, said in an interview on Bloomberg Television’s “Surveillance Midday” with Tom Keene on Aug. 2. “There’s now a 50 percent chance that we could slide into a new recession. Nothing has given us much growth.”
Commodity Producers
Energy and raw-material shares led the declines in the S&P 500, falling 10 percent and 9.5 percent, respectively. Chevron Corp. (CVX), the second-largest U.S. oil company, slid 6.2 percent to $97.61. Alcoa, the nation’s largest aluminum producer, sank 13 percent to $12.79.
AK Steel Holding Corp. (AKS), the third-largest U.S. steelmaker by sales, plunged 25 percent to $9.12, its lowest price since April 2009. Freeport-McMoRan Copper & Gold Inc., the world’s largest publicly traded copper producer, decreased 13 percent to $45.99 as metal prices declined.
Bank of America, the largest U.S. lender by assets, fell 16 percent to $8.17, the lowest price since April 2009. Matthew Burnell, an analyst at Wells Fargo & Co., cut his recommendation on the bank to “market perform” from “outperform” because of lower expectations for the American economy.
The KBW Bank Index (BKX) of 24 U.S. financial stocks slid 10 percent, and has declined on 10 of the past 11 days, amid concern Europe’s sovereign debt crisis may spread. Citigroup Inc. (C) dropped 13 percent to $33.44.
MetroPCS Communications Inc. (PCS) tumbled 41 percent to $9.53 for the biggest retreat in the S&P 500. The mobile-phone carrier reported earnings that trailed analyst estimates.
Kraft Foods Inc. (KFT) was the only Dow stock to advance, climbing 1.4 percent to $34.87. The world’s second-biggest food company plans to spin off its North American grocery business to shareholders, splitting the existing company in two.
MasterCard Inc. (MA), the second-biggest payments network, gained the most in the S&P 500, rallying 7.7 percent to $326.54 after profit rose 33 percent as customers’ spending increased.
To contact the reporter on this story: Nikolaj Gammeltoft in New York at ngammeltoft@bloomberg.net.
To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net
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